Section 271C of the Income-tax Act, 1961: Penalty for Failure to Deduct Tax at Source
Section 271C concerns a penalty equal to the tax that a person failed to deduct at source or failed to pay in specified statutory circumstances. This guide explains the scope, exceptions, procedural safeguards and related TDS provisions.
Updated 28 October 2026. The law applicable to a particular default depends on its date and the relevant transitional provisions.
Section 271C: meaning and penalty amount
Under section 271C(1)(a) of the Income-tax Act, 1961, a person who fails to deduct the whole or part of tax required by Chapter XVII-B may be liable to a penalty equal to the amount of tax that was not deducted. Section 271C(1)(b) also addresses failure to pay tax in the specific situations expressly listed in that clause, subject to amendments applicable to the relevant period.
The penalty is not automatically calculated as a percentage of the gross payment. First determine whether TDS was legally required, the correct tax amount and whether the person failed to deduct all or part of it.
What failures are covered by Section 271C?
Failure to deduct TDS: Section 271C(1)(a)
This clause covers non-deduction or short deduction of tax required under Chapter XVII-B. Depending on the nature of the payment, that chapter includes provisions for salaries, interest, contractor payments, professional fees, rent, non-resident payments and other specified sums. Each charging and withholding provision has its own conditions, thresholds, exemptions and rates.
Specified failure to pay: Section 271C(1)(b)
The source provision referred to failure to pay tax required under section 115-O(2) and the second proviso to section 194B. Section 115-O concerned dividend distribution tax, a regime abolished for dividends distributed on or after 1 April 2020; the statutory language and amendments must be checked for the period in dispute. The second proviso to section 194B addresses tax on qualifying lottery or similar winnings where winnings are wholly or partly in kind and sufficient cash is unavailable for deduction. Do not treat section 271C(1)(b) as a general penalty for every late TDS deposit.
Who imposes the penalty?
Section 271C(2) provides for imposition by the Joint Commissioner. The taxpayer is entitled to applicable statutory procedural safeguards, including a reasonable opportunity to be heard.
Illustrative penalty calculation
Suppose a payment legally required deduction of Rs. 80,000 in TDS, but no tax was deducted. The measure of penalty under section 271C(1)(a) would be Rs. 80,000. If Rs. 50,000 had been deducted and Rs. 30,000 was omitted, the relevant short-deduction amount would be Rs. 30,000. These are illustrations only; liability and relief depend on the applicable law and evidence.
Reasonable cause under Section 273B
Section 273B of the 1961 Act provides that no penalty shall be imposed under specified sections, including section 271C, where the person proves that there was reasonable cause for the failure. Reasonable cause is fact-specific: a taxpayer should preserve contracts, tax opinions, correspondence, relevant withholding certificates, evidence of genuine uncertainty and steps taken to correct the issue.
The mere fact that tax was ultimately paid does not by itself establish reasonable cause; conversely, penalty should not be treated as unavoidable without examining the statutory defence and the particular circumstances.
Difference between penalty, interest and other consequences
| Provision | Purpose |
|---|---|
| Section 271C | Penalty for non-deduction or short deduction of TDS and specified failures to pay tax. |
| Section 201(1) | Consequences of being treated as an assessee in default, subject to statutory conditions and relief. |
| Section 201(1A) | Interest for failure to deduct or pay TDS at the applicable statutory rate and period. |
| Section 40(a)(ia) / 40(a)(i) | Potential disallowance of specified expenditure, subject to conditions and subsequent compliance rules. |
| Section 271H | Separate penalty for failure to furnish, or furnishing incorrect, TDS/TCS statements. |
| Section 276B | Potential prosecution for specified failures to pay tax deducted, subject to its own ingredients. |
Important judicial distinction: In US Technologies International Pvt. Ltd. v. CIT (Supreme Court, 2023), the Court considered the scope of section 271C and distinguished non-deduction from delayed remittance of tax already deducted. Late deposit may attract other consequences; it should not automatically be equated with failure to deduct for section 271C(1)(a).
Income-tax Act, 2025 and transitional applicability
The Income-tax Act, 2025 commenced on 1 April 2026. For tax years and proceedings governed by that Act, use its corresponding TDS, interest and penalty provisions as amended, rather than assuming that section numbers from the 1961 Act continue unchanged. Earlier defaults and proceedings may continue under the 1961 Act through applicable repeal and saving provisions.
Because penalty consequences are date-sensitive, confirm the relevant tax year, date of deduction or default, any transitional rule and the precise enacted text before applying a rate or commencing proceedings.
Practical compliance steps
- Classify the payment and identify the applicable TDS provision, rate and threshold.
- Check PAN, residency, exemptions and any lower or nil deduction certificate.
- Deduct tax at the legally required time and deposit it by the prescribed due date.
- File accurate TDS statements and issue required certificates.
- Reconcile the books, challans and Form 26AS / TDS records.
- If a notice is issued, identify whether the allegation concerns non-deduction, short deduction or delayed deposit, and respond with supporting evidence.
Legislative history of Section 271C
Section 271C was inserted by the Direct Tax Laws (Amendment) Act, 1987 (Act 4 of 1988), with effect from 1 April 1989. It was amended by the Finance Act, 1990 and substituted in part by the Finance Act, 1997 with effect from 1 June 1997. Subsection (2) assigns penalty jurisdiction to the Joint Commissioner, replacing the earlier reference to the Deputy Commissioner with effect from 1 October 1998. The exact version of the provision must be matched to the relevant default.
Original page: statutory wording and amendment notes
(1) If any person fails to (a) deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B; or (b) pay the whole or any part of the tax as required by or under (i) sub-section (2) of section 115-O; or (ii) the second proviso to section 194B, then such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.
(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.
Original legislative notes: inserted by Act 4 of 1988, section 108 (1 April 1989); subsection (1) substituted by Act 26 of 1997, section 53 (1 June 1997); amended and renumbered by Act 12 of 1990, section 44 (1 April 1990); officer designation substituted by Act 21 of 1998, section 3 (1 October 1998).
Frequently asked questions
What is the penalty under Section 271C?
It is ordinarily equal to the tax that should have been deducted but was not deducted, or the amount not paid in the specifically covered cases, subject to the relevant statutory wording and available defences.
Can reasonable cause prevent a Section 271C penalty?
Yes. Section 273B provides relief where the person proves reasonable cause for the relevant failure.
Does every late deposit of TDS attract Section 271C?
No. Non-deduction and late remittance of tax already deducted must be distinguished. Interest, other penalties or prosecution may apply depending on the circumstances.
Official legislation and useful references
- Income Tax Department - official legislation and tax guidance (search for section 271C, section 273B and section 201).
- Income Tax Department e-Filing Portal - TDS services and taxpayer compliance.
- India Code - central legislation, including applicable Income-tax Acts and amendments.
- Supreme Court of India - judgments, including the 2023 US Technologies decision.
This article is educational and is not a substitute for checking the enacted text and case-specific professional advice.